Tuesday, January 25, 2011

Important trend change in the economy

After declining throughout the aftermath of 2008 and basing in the latter half of 2010, bank lending has started to come up out of its base.

If base lending were a stock, I'd buy it right now.

This is important because many people falsely equate printing more money as necessarily causing inflation, while completely neglecting the fact that inflation=money supply (printed money) * money velocity (bank lending in the fractional reserve system).  Now, it finally seems that we may avoid the plight of Japan of the last 2 decades and the US Great Depression experience because the Fed has so forced so much liquidity into the system that money velocity is on the upswing.  It might be no coincidence that the uptrend on the gold/silver charts appear broken, perhaps portending increased interest rates caused by increasing inflation (contrary to popular belief, gold/silver are not "inflation hedges"; empirically, gold/silver in USD terms outperforms during times of low US interest rates).

That's not to say that the housing and muni markets aren't still sickly, US debt credit risks atrocious, and USD fundamentals abysmal.  Of course they still are.  Housing will remain a drag on aggregate US inflation until housing inventories dry up.  But I'm no longer as deflationist as I was before I saw this chart.